Research project: Firm-Specific Climate Risk and Market Valuation
Henk Berkman, Jonathan Jona, and Naomi Soderstrom
Abstract:
In alignment with the call in Engle et al. (2020) to improve the measurement of firm-level climate risk exposure, we explore usefulness of a firm-specific measure based on 10-K disclosures of climate risk. We find that our measure has incremental explanatory power for firm valuation over climate risk-related measures currently used in the literature. Further, our measure is broadly available, which extends the span of questions related to firm-specific climate risk that can be investigated. Corroborating its usefulness, we find that relative to hedge portfolios based upon the other measures, the return on a hedge portfolio that is long (short) on firms with high (low) values of our climate risk measure has the strongest negative association with a US-news based measure of climate change concerns. By exploiting the broad climate-related disclosures in 10-Ks, our measure provides a tool to better understand valuation implications of climate risk for firms.
Climate risk measure derived from 10-K disclosures:
The SEC Climate Disclosure Search Tool was developed by Ceres and CookESG Research and started in 2009. Ceres is a coalition of investors, firms, and environmental organizations advocating for sustainability leadership. The climate risk disclosure data are available on the Ceres website (http://www.ceres.org/resources/tools/sec-climate-disclosure/sec-climate-disclosure). The data are coded based upon keywords and natural language processing to identify combinations of words—e.g., “EU trading system”.
Developer of the tool Jackie Cook of CookESG Research notes that the Ceres portal “helps investors make sense of textual climate disclosures, conduct company-to-company comparisons and identify best practice” (https://www.ceres.org/news-center/press-releases/new-sec-search-tool-shines-light-what-fossil-fuel-companies-are-saying). Appendix A in the paper provides more details.
For convenience, the measure used in the paper Firm-Specific Climate Risk and Market Valuation at the 10-K level is available here below.
Researchers can also access the measure and any updates directly using the API that is available from the authors upon request. Using the example of Coca Cola (from the Coca Cola Consolidated 2022 10-K filing, ticker "COKE"), here is the protocol for accessing a specific file:
Identify the file name you are interested in from EDGAR SEC Filing (e.g., Coca Cola Consolidated 2022 10-K filing: '0000317540-22-000009')
Use the API provided by the authors including the file name for the company (e.g., '0000317540-22-000009') to access the data.
Data for the file, including the climate risk score ("relevance_score" for each excerpt is presented. For example, the Coca Cola Consolidated 2022 10-K filing: '0000317540-22-000009' includes two identified excerpts: "excid":0 and "excid":1 with "relevance_score":2 and "relevance_score":24, respectively.
Summing up scores for both excerpts yields a total climate risk score of 26 for the filing '0000317540-22-000009'.
We recommend that researchers employ an automated process to download the scores if multiple files are desired.
Data employed in the paper for downloading:
Download the aggregated annual firm-level climate risk measure here (csv format): Ceres measure, Russell 3,000 2010-2020.
Download the individual excerpt data here (Stata dta format): Info by excerpt Russell 3,000 2010-2020.
Examples:
Coca Cola Consolidated, Inc (ticker "COKE", File name "0001564590-19-005000", filing date Feb 27, 2019) reports one excerpt with a climate risk score of 10. The full excerpt can be found in the attached file as well as the score for that year. For a screenshot from Ceres's website click HERE.
Church & Dwight CO, Ink, Inc (ticker "CHD", File name "0001564590-19-003587", filing date Feb 21, 2019) reports three excerpts with a total climate risk score of 10. The excerpts and thier associated climate risk scores can be found in the attached file as well as the total score for that year. For a screenshot from Ceres's website click HERE.
Updated data (latest 10-K filing date is March 3, 2023) for downloading:
Download the individual excerpt data, including individual scores, here (Stata dta format): Info by excerpt Russell 3,000 2009-2023